Topic 9 - Tutorial Solutions

Question 14.9 Materiality and events occurring after the end of the
reporting period
You are currently auditing the financial statements and records of Buffalo Ltd for the year
ended 30 June 2018. In the course of your investigations you uncover the following
transactions that occurred after the end of the reporting period but which appear to relate
to the financial year ended 30 June 2018:
1. Sales return notes raised for goods returned in the final 2 weeks of June 2018 were posted
as July 2018 sales returns. The goods returned were worth $16 500.
2. On 16 September 2018 there was a fire in the company’s main warehouse. Loss of
inventory was covered by insurance but there was significant disruption to the flow of
production output. The financial effects of the disruption are estimated to be $150 000,
and are not covered by insurance.
3. Buffalo Ltd manufactures textiles and purchases raw cotton from overseas. A shipment of
cotton was in transit at the end of the reporting period and, given that the price per bale
is determined by quality, an estimated cost of $125 000 was recognised. The cotton duly
arrived on 18 July 2018 and after examination it was determined that the cost will be
$163 000.
4. On 23 July 2018 a favourable judgement was handed down in a lawsuit lodged by Buffalo
Ltd against a major supplier for damages arising from poor-quality materials delivered
in April 2017. The damages and costs awarded to Buffalo Ltd totalled $1 500 000.
Assume all items are material.

Required
Classify each item as either an adjusting or non-adjusting event after the end of the reporting
period. Justify your answer.

A.

1. Misposting of sales returns notes

These incorrectly posted transactions overstate Sales Revenue and Accounts Receivable by $16
500.

Base Amount Error as % of base

Profit before tax $218 000 7.6%
Sales Revenue 10 000 000 0.2%
Receivables (Current assets) 431 000 3.8%

The error is not greater than 10% for any of the relevant base amounts. However, it is between 5-
10% of profit and thus its materiality is a matter of judgement.
2. Uninsured disruption to production output

This disruption (financial effects estimated to be $150 000) will have an overall decreasing effect
on future profits. As future profits are concerned average base amounts will be used.

Base Amount Error as % of base

Average profit before tax $266 500 56.3%
Average equity 228 000 65.8%

This event is material.

3. Increased cost of raw cotton inventory

The increase in cost affects Inventory and Accounts Payable by $38 000 ($163 000 - $125 000).

Base Amount Error as % of base

Inventory (Current assets) $431 000 8.8%
Accounts payable (Current
liabilities) 396 000 9.6%

Given that the understatement is close to 10% of both base amounts it is likely to be regarded as
material.

4. Receipt of damages

The damages award will increase Revenue and Cash by $1.5 million.

Base Amount Error as % of base

Profit before tax $218 000 >100%
Cash (Current assets) 431 000 > 100%

The item is clearly material.

B.

The following events provide more information about conditions existing at the end of the
reporting period and are adjusting events:

Misposting of sales returns notes

Increase in cost of raw cotton inventory
Receipt of damages

The following events do not relate to conditions existing at the end of the reporting period but do
provide material information with respect to future financial performance or financial position and
are non-adjusting events:
Uninsured disruption to production output
Question 15.17 Statement of profit or loss and other comprehensive
income (classify expenses by nature), statement of financial position and
statement of changes in equity
The summarised trial balance of Star Ltd as at 30 June 2017 is shown below.

Debit Credit
Ordinary share capital (1 500 000 shares) $1 062 500
General reserve (1/7/16) 175 000
Revaluation surplus (1/7/16) 60 000
Retained earnings (1/7/16) 104 500
Bank loan (long-term) 43 500
Deferred tax liability (1/7/16) 3 000
Mortgage (long-term) 50 000
Accounts payable 132 000
Provision for employee benefits (long-term) 75 000
Allowance for doubtful debts 37 500
Accumulated depreciation:
Plant 9 500
Office furniture 850
Buildings 2 500
Land (at cost) $ 211 500
Factory buildings (at cost) 250 000
Accounts receivable 542 950
Plant (at cost) 90 000
Inventory 651 100
Office furniture (at cost) 6 000
Goodwill 200 000
Cash at bank 278 800
Employee benefits expense 12 500
Sales 1 730 500
Raw materials and consumables used 1 083 100
Changes in inventories of finished goods and 3 100
work in progress
Other expenses (excluding depreciation but
including interest expense $31 000 on bank loan 163 500
and mortgage)
$3 489 450 $3 489 450
The accountant for the company seeks your assistance in preparing the financial statements
for external reporting purposes and advises you of the following information that needs to
be taken into account before finalising the financial statements.
Additional information
(a) Depreciation is to be provided for:
Plant $9 000
Office furniture 800
Buildings 2 500
(b) The estimated total income tax expense relating to profit or loss items only for 2017 is
$200 000, consisting of $150 000 for the current liability and $50 000 as a deferred tax
liability.
(c) Final dividends of 2 cents per share were declared by directors.
(d) Directors decided to transfer $10 000 from retained earnings to general reserve.
(e) Following expert advice, the directors decided on 30 June 2017 to revalue the land and
factory buildings to reflect current fair values. Consequently, directors placed a value of
$300 000 on land and $350 000 on the buildings.
(f) Company tax rate is 30%.

Required
Based on the ledger balances and the additional information provided, prepare a statement
of profit or loss and other comprehensive income (classify expenses by nature), a statement
of financial position and a statement of changes in equity for Star Ltd for the year ended 30
June 2017, to comply with AASB 101.

[Comparative information must be disclosed in respect of the preceding period for all amounts
reported in the current period's financial statements in accordance with AASB 101 paragraph
38. However this information is not provided in the question].

STAR LTD
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 30 June 2017
Revenue $ 1 730 500
Changes in inventories of finished goods and
work in progress 3 100
Raw materials and consumables used (1 083 100)
Employee benefits expense (12 500)
Depreciation* (12 300)
Other expenses** (132 500)
Finance costs (31 000)
Profit before income tax 462 200
Income tax expense (200 000)
Profit for the period 262 200
Other comprehensive income
Items that will not be reclassified to profit or loss
Gain on revaluation of land*** 88 500
Gain on revaluation of buildings*** 105 000
Income tax relating to items not reclassified (58 050)
Other comprehensive income for the year, net of tax 135 450
Total comprehensive income for the year $ 397 650

Workings:
*Depreciation:
Plant $ 9 000
Office furniture 800
 Buildings 2 500
12 300
**Other expenses:
Other expenses $ 163 500
Less interest expense (31 000)
132 500
***Gain arising during the year on revaluation of:
Land (300 000 –211 500) $ 88 500
Buildings (350 000 – (250 000 – (2 500 acc. dep. + 2 500 dep.))) 105 000
 STAR LTD
Statement of Financial Position
as at 30 June 2017

ASSETS
Current assets
Cash and cash equivalents $ 278 800
Trade and other receivables* 505 450
Inventories 651 100
Total current assets 1 435 350

Non-current assets
Property, plant and equipment** 725 850
Goodwill 200 000
Total non-current assets 925 850
Total assets $ 2 361 200

LIABILITIES
Current liabilities
Trade and other payables*** $ 162 000
Current tax payable 150 000
Total current liabilities 312 000

Non-current liabilities
Long-term borrowings**** 93 500
Deferred tax liabilities***** 111 050
Long-term provisions 75 000
Total non-current liabilities 279 550
Total liabilities $ 591 550

Net assets $ 1 769 650

EQUITY
Share capital $ 1 062 500
Reserves 380 450
Retained earnings 326 700
Total equity $ 1 769 650

Workings:

*Trade and other receivables:

Accounts receivable $ 542 950
Allowance for doubtful debts (37 500)
505 450
**Property, plant and equipment:
Freehold land $300 000
Factory buildings 350 000
650 000
Plant 90 000
Accumulated depreciation [9 500 + 9 000] (18 500) 71 500
Office furniture 6 000
Accumulated depreciation [850 + 800] (1 650) 4 350
725 850

***Trade and other payables:

Accounts payable $ 132 000
Dividend payable (1 500 000 shares x 2 cents per share) 30 000
162 000

****Long-term borrowings:
Bank loan $ 43 500
Mortgage 50 000
93 500

***** Deferred tax liabilities:

Balance 1/7/2016 $ 3 000
Deferred tax portion of income tax expense 50 000
Revaluation of:
Land (30% x [300 000 – 211 500]) 26 550
Buildings (30% x [350 000 – (250 000 – (2 500 + 2 500)]) )31 500 58 050
111 050

STAR LTD
Statement of Changes in Equity
for the year ended 30 June 2017

Share General Reval. Retained Total

capital reserve surplus earnings
Balance at 1 July 2016 $ 1 062 500 $ 175 000 $ 60 000 $ 104 500 $ 1 402 000
Total comprehensive income
for the year - - 135 450 262 200 397 650

Dividend declared – ordinary - - - (30 000) (30 000)

Transfer to general reserve - 10 000 - (10 000) -
Balance at 30 June 2017 $ 1 062 500 $ 185 000 $ 195 450 $ 326 700 $ 1 769 650

Dividends: 2 cents per share